Anarchists (”free market anarchists” or ”anarcho-capitalists)” are flocking in and around the Ludwig von Mises Institute, both in the US and here in Sweden. So what did Mises himself think about anarchism and anarchists? He covers the subject in a section in The Ultimate Foundation of Economic Science, p. 98f, so let me quote:

Government as such is not only not an evil, but the most necessary and beneficial institution, as without it no lasting social cooperation and no civilization would be possible.

And a bit later on:

A shallow-minded school of social philosophers, the anarchists, chose to ignore the matter by suggesting a stateless organization of mankind. They simply passed over the fact that men are not angels. They were too dull to realize that in the short run an individual or a group of individuals can certainly further their own interests at the expense of their own and all other peoples’ long-run interests. A society that is not prepared to thwart the attacks of such asocial and short-sighted aggressors is helpless and at the mercy of its least intelligent and most brutal members. While Plato founded his utopia on the hope that a small group of perfectly wise and morally impeccable philosophers will be available for the supreme conduct of affairs, anarchists implied that all men without any exception will be endowed with perfect wisdom and moral impeccability. They failed to conceive that no system of social cooperation can remove the dilemma between a man’s or a group’s interests in the short run and those in the long run.

Note the insultory language here: anarchists are “shallow-minded” and “dull”. If I said that of an anarchist, I would probably be accused of making an ad hominem argument.

But that was an aside. The substantive thing here is that we have a group of social philosophers – “free market anarchists” – who believe that a government or a state is evil by its very nature (and sometimes even the source of all evil) – and yet are willing to accept as their mentor, master and dean someone who claims the exact opposite: that government is “the most necessary and beneficial institution”.

The main flaw of “free market anarchism” is that it refuses to make a distinction between initiatory and retaliatory force. They oppose any government, even the most limited government, one that only engages in retaliatory force against initiators of force (such as criminals and foreign invaders), on the grounds that it uses force. (And they are of course blind to the fact that those “protection agencies” with which they propose to replace government, would also use force.)

Mises is aware of this distinction. When he says that “men are not angels”, he refers to the fact that some men are criminals, and that criminal acts will have to be thwarted. Thwarting criminality and foreign aggression is certainly both necessary and beneficial.

Mises had a psychological explanation for the fact that some fairly intelligent people become anarchists: it was “a reaction to the deification of the state”. (I got this from Hülsmann’s Mises: The Last Knight of Liberalism, p. 1025.) I have said virtually the same thing myself: people become anarchists because they are fed up with the way governments conduct their affairs today; and they cannot conceive of a limited government that does nothing but protect our rights against domestic and foreign aggressors. But that there is a psychological explanation for anarchism does not make anarchism right.

In unthinking protest against this trend [the trend toward more and more statism], some people are raising the question of whether government as such is evil and whether anarchy is the ideal social system. Anarchy, as a political concept, is a naïve floating abstraction: for all the reasons discussed above, a society without an organized government would be at the mercy of the first criminal who came along and would precipitate it into the chaos of gang warfare.

I see no difference between Rand and Mises on this issue. And I’m neither shallow-minded nor dull.

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The response to this note was largely positive, although (of course) a couple of anarchists admonished me to wade through all the anarchocapitalist literature before I open my mouth. There was also some lively and friendly discussion. I will quote one of my own comments, because I think I am on to something important here:

There is one thing I think needs to be emphasized:

We have plenty of historical experience with various forms of government, or various forms of organizing society. We have primitive tribes, Greek city states, the Roman empire, feudalism, absolute monarchy. representative government, modern dictatorships (to name those that readily come to mind). We can study the historical evidence and draw conclusions from it, e.g. that representative government is a great step forward, or that there is a strong correlation between the degree of freedom in a society and the degree of wealth.

But we have absolutely no experience with a situation where a proper limited government (or “night watchman state” as I usually call it) is vying with anarchocapitalist protection agencies. So there is no historical evidence to point to and draw conclusions from. All we can do is imagine scenarios.

I think this is one reason it is so difficult to get the point across to the anarchocapitalists. They paint a rosy scenario of protection agencies peacefully competing with one another; and we paint a bleak scenario of protection agencies fighting it out in the streets. When we are fighting the anarchocapitalists, we are fighting against floating abstractions and fantasies.

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Addendum 2016: An objection one commonly hears from anarcho-capitalists is that Mises is merely referring to left-wing anarchism and that his view does not apply to right-wing capitalism or anarcho-capitalism. This was a development he simply did not know about and thus could not criticize.

But this objection does not hold water. Murray Rothbard, the father of modern anarcho-capitalism, first developed this idea as early as the late 40’s. Mises certainly was aware of this. (See on this Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism, the section “Last Skirmishes with the Anarchists”, p. 1023–1030.)

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PS. On Facebook I was asked this question:

Why is it so important that Rand and Mises were in agreement?

Yes, why on earth? Obviously, this whole blog post is a gross ad verecundiam or “argument from authority”. I just feel so much better having two great authorities behind me than just one.

My latest blog post, Murray Rothbard on Organized Crime, was shared by a couple of persons on Facebook – and in one comment, I was accused of “cherry picking”, because I chose only one article and took it as representative of Rothbard’s entire view.

“Cherry picking” is an inductive fallacy which consists in taking the inductive generalization one wants to reach for granted and then only giving examples that support this generalization and ignoring or suppressing evidence that points in another direction. Proper induction, of course does not start with a generalization; the generalization is the end product of the induction. (This fallacy could also be called “inductive circularity”: it begs the question, just like deductive circularity does.)

As an aside, I was not accused of “cherry picking” for linking to several books and pamphlets by Rothbard, leading to the inductive generalization that he was a great economist. But if Rothbard has made major mistakes as an economist (as opposed to a political thinker), I have not discovered them; so I can hardly be accused of deliberately ignoring or suppressing them.

Anyway, I will now “cherry pick” some things that Rothbard has written about Communism and the Soviet Union in particular.

Libertarians of the present day are accustomed to think of socialism as the polar opposite of the libertarian creed. But this is a grave mistake, responsible for a severe ideological disorientation of libertarians in the present world. […] Socialism, like Liberalism and against Conservatism, accepted the industrial system and the liberal goals of freedom, reason, mobility, progress, higher living standards [for] the masses, and an end to theocracy and war; but it tried to achieve these ends by the use of incompatible, Conservative means: statism, central planning, communitarianism, etc. Or rather, to be more precise, there were from the beginning two different strands within Socialism: one was the Right-wing, authoritarian strand, from Saint-Simon down, which glorified statism, hierarchy, and collectivism and which was thus a projection of Conservatism trying to accept and dominate the new industrial civilization. The other was the Left-wing, relatively libertarian strand, exemplified in their different ways by Marx and Bakunin, revolutionary and far more interested in achieving the libertarian goals of liberalism and socialism: but especially the smashing of the State apparatus to achieve the “withering away of the State” and the “end of the exploitation of man by man.” (P. 15f; italics mine.)

So Libertarianism (of the Rothbardian variety) has the same ultimate goal as Bakunin and Marx: the smashing, or withering away, of the State. Bakunin and Marx are allies in this struggle. (While thinkers like Ludwig von Mises and Ayn Rand, who did not want to smash the State, only to reduce it to its proper functions, are not allies but rather enemies. Rothbard would not call Mises an enemy, but this is the clear implication.[1])

It was in reaction to this collapse that Lenin broke out of the Second International, to re-establish classic revolutionary Marxism in a revival of Left Socialism. […] In fact, Lenin, almost without knowing it, accomplished more than this. […] There were, indeed, marked “conservative” strains in the writings of Marx and Engels themselves which often justified the State, Western imperialism and aggressive nationalism […] Lenin’s camp turned more “left” than had Marx and Engels themselves. Lenin had a decidedly more revolutionary stance toward the State, and consistently defended and supported movements of national liberation against imperialism. The Leninist shift was more “leftist” in other important senses as well. For while Marx had centered his attack on market capitalism per se, the major focus of Lenin’s concerns was on what he conceives to be the highest stages of capitalism: imperialism and monopoly. Hence Lenin’s focus, centering as it did in practice on State monopoly and imperialism rather than on laissez-faire capitalism, was in that way far more congenial to the libertarian than that of Karl Marx. (P. 22f.)

In other words: Bakunin and Marx are regarded as allies, because they were against the State; but Lenin is even more of an ally, since he was even more against the State!

There is, of course, one big question that Rothbard should have had the sense to ask of himself: How come those state haters and would-be state-smashers, Marx and Lenin even more, founded what is probably the most totalitarian and most oppressive state in all of history? Rothbard has no explanation for this – unless you call this an “explanation”:

… the Communists did not attempt to impose socialism upon the economy for many years after taking power: in Soviet Russia until Stalin’s forced collectivization of the early 1930s reversed the wisdom of Lenin’s New Economic Policy, which Lenin’s favorite theoretician Bukharin would have extended onward towards a free market. (P. 45.)

What, then, does Rothbard have to say about Communism’s and the Soviet Union’s quest for world domination, about the fact that the whole of Eastern Europe were satellites to the Soviet Union from the end of World War II and until the late 1980’s, about its efforts to export Communism to Cuba and to Third World countries? Rothbard explains that those thing have never taken place. In his For a New Liberty: The Libertarian Manifesto there is a chapter on Libertarian foreign policy, in which he writes:

Any idea of “exporting” communism to other countries on the backs of the Soviet military is totally contradictory to Marxist-Leninist theory. […] When the Bolsheviks took power in Russia in1917, they had given little thought to a future Soviet foreign policy, for they were convinced that Communist revolution would soon follow in the advanced industrial countries of Western Europe. When such hopes were dashed after the end of World War I, Lenin and his fellow Bolsheviks adopted the theory of “peaceful coexistence” as the basic foreign policy for a Communist State. The idea was this: as the first successful Communist movement, Soviet Russia would serve as a beacon for and supporter of other Communist parties throughout the world. But the Soviet State qua State would devote itself to peaceful relations with all other countries, and would not attempt to export communism through inter-State warfare. The idea here was not just to follow Marxist-Leninist theory, but was the highly practical course of holding the survival of the existing Communist State as the foremost goal of foreign policy: that is, never to endanger the Soviet State by courting inter-State warfare. Other countries would be expected to become Communist by their own internal processes. Thus, fortuitously, from a mixture of theoretical and practical grounds of their own, the Soviets arrived early at what libertarians consider to be the only proper and principled foreign policy. As time went on, furthermore, this policy was reinforced by a “conservatism” that comes upon all movements after they have acquired and retained power for any length of time, in which the interests of keeping power over one’s nation-state begins to take more and more precedence over the initial ideal of world revolution. This increasing conservatism under Stalin and his successors strengthened and reinforced the nonaggressive, “peaceful coexistence” policy. (P. 290f.)

So Stalin was a man of peace, according to Rothbard. No explanation is given for the Molotov-Ribbentrop pact and the joint attack on Poland that inaugurated World War II; but he makes some fuss about the necessity for the Soviet Union to defend itself against the German attack later in the war. Another quote:

So unprepared was Stalin for the assault, so trusting was he in the rationality of the German-Russian accord for peace in Eastern Europe, that he had allowed the Russian army to fall into disrepair. So unwarlike was Stalin, in fact, that Germany was almost able to conquer Russia in the face of enormous odds. (P. 292.)

And to the question why Stalin, after the end of World War II, took the opportunity to take over the whole of Eastern Europe, Rothbard does have an answer: It was to protect the Soviet Union from the threat of invasion from the West!

Since their victory over German and associated military aggression [from, e.g. Finland] in World War II, the Soviets have continued to be conservative in their military policy. Their only use of troops has been to defend their territory in the Communist bloc, rather than to extend it further. Thus, when Hungary threatened to leave the Soviet bloc in 1956, or Czechoslovakia in 1968, the Soviets intervened with troops—reprehensibly, to be sure, but still acting in a conservative and defensive rather than expansionist manner. (P. 295.)

And:

Russia, therefore, governed Eastern Europe as military occupier after winning a war launched against her. Russia’s initial goal was not to communize Eastern Europe on the backs of the Soviet army. Her goal was to gain assurances that Eastern Europe would not be the broad highway for an assault on Russia, as it had been three times in half a century—the last time in a war in which over twenty million Russians had been slaughtered. In short, Russia wanted countries on her border which would not be anti-Communist in a military sense, and which would not be used as a springboard for another invasion. Political conditions in Eastern Europe were such that only in more modernized Finland did non-Communist politicians exist whom Russia could trust to pursue a peaceful line in foreign affairs. And in Finland, this situation was the work of one far-seeing statesman, the agrarian leader Julio Paasikivi. It was because Finland, then and since, has firmly followed the “Paasikivi line” that Russia was willing to pull its troops out of Finland and not to insist on the communization of that country—even though it had fought two wars with Finland in the previous six years. (P. 294.)

Another word for the “Paasikivi line” is Finlandization. In short, Finland had to very carefully toe the line in its dealing with the Soviet Union.

If the Soviet Union and Communist states in general were so peaceful and never waged war except in self-defense, then what states are not that peaceful?

… empirically, taking the twentieth century as a whole, the single most warlike, most interventionist, most imperialist government has been the United States. (P. 277.)

If it is understood and expected, then, that the United States will try to impose its will on every crisis everywhere in the world, then this is clear indication that America is the great interventionary and imperial power. The one place where the United States does not now attempt to work its will is the Soviet Union and the Communist countries … (P. 278.)

One does not have to be an ardent admirer of US foreign policy to sense that there is something wrong here …[2]

Well, I think this is just about enough “cherry picking” for today.[3]

Update June 11 2015: With regard to Soviet foreign policy, Mises held the exact opposite view. I quote from Planned Chaos:

For the time being [1947], the ominous peril of the communist parties in the West lies in their stand on foreign affairs. The distinctive mark of all present-day communist parties is their devotion to the aggressive foreign policy of the Soviets. Whenever they must choose between Russia and their own country, they do not hesitate to prefer Russia. Their principle is: Right or wrong, my Russia. They strictly obey all orders issued from Moscow. When Russia was an ally of Hitler, the French communists sabotaged their own country’s war effort and American communists passionately opposed President Roosevelt’s plans to aid the democracies in their struggle against the Nazis. The communists all over the world branded all those who defended themselves against the German invaders as “imperialist warmongers”. But as soon as Hitler attacked Russia, the imperialistic war of the capitalists over night changed into a just war of defense. Whenever Stalin conquers one more country, the communists justify this aggression as an act of self-defense against “Fascists”. (P. 43f; or p. 504 in Socialism: An Economic and Sociological Analysis, where this short book is included as an epilogue.)

According to Rothbard, the Soviets foreign policy after World War II was not aggressive at all! It was all a matter of self-defense! Mises certainly was more realistic.

[2]) Murray Rothbard was not personally oppressed by the Soviet Union, since he did not live there. He was, no doubt, oppressed by the government of the United States. But I am oppressed by the Swedish government, and it does not make me an apologist for the Soviet Union.

[3]) Just one epistemological note: If one has reached an inductive generalization from observing a few instances, one would expect future observations to fall into line – just as one expects all future tables to be pretty much similar to the few tables from which one originally formed the concept. This is not “cherry picking”.

One may find exceptions – and then one will have to look into what explains those exceptions. A simple example: One has formed the inductive generalization that paper quickly starts burning, when it comes into contact with fire. Then one finds a counter-example: paper that does not catch fire or does so only slowly. Looking into the matter, one finds that this particular paper bundle is soaked with water. The exception is explained.

And it might just happen that one finds some instance of Rothbard making sense, even when he writes about politics; and then one has to look for an explanation …

Murray Rothbard was a great economist[1], and a disaster when it came to politics.

A while ago, I came across this article, about The Godfather I & II and other Mafia movies. A few quotes:

The key to The Godfathers and to success in the Mafia genre is the realization and dramatic portrayal of the fact that the Mafia, although leading a life outside the law, is, at its best, simply entrepreneurs and businessmen supplying the consumers with goods and services of which they have been unaccountably deprived by a Puritan WASP culture. […]

Hence the systemic violence of Mafia life. Violence, in The Godfather films, is never engaged in for the Hell of it, or for random kicks; the point is that since the government police and courts will not enforce contracts they deem to be illegal, debts incurred in the Mafia world have to be enforced by violence […]. But the violence simply enforces the Mafia equivalent of the law: the codes of honor and loyalty without which the whole enterprise would simply be random and pointless violence. […]

Organized crime is essentially anarcho-capitalist, a productive industry struggling to govern itself; apart from attempts to monopolize and injure competitors, it is productive and non-aggressive. Unorganized, or street, crime, in contrast, is random, punkish, viciously aggressive against the innocent, and has no redeeming social feature. [Italics mine.]

What is the logic (or praxeology) of this? Let me take it step by step:

States are organizations. A particular state may be well organized or badly organized, but an “unorganized state” would be a contradiction in terms.

According to Rothbard and his followers, states are criminal by their very nature. This is why they dismiss the idea of a rights-respecting and rights-protecting state (limited government or a “night watchman” state) as illusory. No matter how hard we try to establish such a state or government, it will always end up with our rights being violated.

Thus, a state is an example of organized crime.

So, if Rothbard (and his followers) is in favor of organized crime, what justification does he (or they) have for opposing the state?

Well, the answer to this seems to be that the state or government is doing a bad job of enforcing law and order. Privately organized crime is simply more effective that governmental organized crime.

And isn’t there a kernel of truth in this? When the state or government does not do its job of enforcing rights – and, instead, violates our rights – other organizations will step in to fill the vacuum.

Organized crime thrives on “victimless crimes”. When drinking is outlawed (as during the Prohibition era) – or taking drugs or gambling – this is when the Mafia takes over and supplies the goods. And when there are heavy taxes on tobacco and alcohol, then organized smuggling takes over. With a truly rights-respecting and rights-protecting government or state, this would not happen. But this, of course, is precisely what the anarcho-capitalists dismiss as illusory.

Rothbard has this graphic illustration of how much better the Mafia is than the government:

One errant, former member of the Corleone famiglia abases himself before The Godfather (Marlon Brando). A certain punk had raped and brutalized his daughter. He went to the police and the courts, and the punk was, at last, let go (presumably by crafty ACLU-type lawyers and a soft judicial system). This distraught father now comes to Don Corleone for justice.

Brando gently upbraids the father: “Why didn’t you come to me? Why did you go to The State?” The inference is clear: the State isn’t engaged in equity and justice; to obtain justice, you must come to the famiglia. Finally, Brando relents: “What would you have me do?” The father whispers in the Godfather’s ear. “No, no, that is too much. We will take care of him properly.” So not only do we see anarcho-capitalist justice carried out, but it is clear that the Mafia code has a nicely fashioned theory of proportionate justice. In a world where the idea that the punishment should fit the crime has been abandoned and still struggled over by libertarian theorists it is heart-warming to see that the Mafia has worked it out in practice.

Now, states are sometimes at war with one another, and sometimes at peace; and this is true of different Mafia groups, as well. About this, Rothbard writes:

In many cases, especially where “syndicates” are allowed to form and are not broken-up by government terror, the various organized syndicates will mediate and arbitrate disputes, and thereby reduce violence to a minimum. Just as governments in the Lockean paradigm are supposed to be enforcers of commonly-agreed-on rules and property rights, so “organized crime,” when working properly, does the same. Except that in its state of illegality it operates in an atmosphere charged with difficulty and danger.

But governments, too, “mediate and arbitrate disputes”. This is what diplomatic services are for – trying to prevent disputes from developing into wars. And wars commonly end with a peace treaty.[2]

It is, of course, true that governments today (and in the past) do a very bad job of protecting our rights and a very good job at violating them. But this is also true of private robber bands. – And I assume that if Rothbard is opposed to unorganized street crime but in favor of organized crime, then he must be opposed to private muggers, who mug on their own with no organization behind them, but in favor of organized robber bands, just because they are organized – or should be, if he follows his own praxeology.

It is also true that the struggle for a proper, limited government (a “night watchman state” or a “constitutional republic” or whatever name for it you prefer) is an uphill struggle. Just think of how many politicians will lose their power, as well as their salaries and other advantages, if this would become true. They will fight back with all their might. But this is also true of Mafias and of all the other “private protection agencies” that the anarcho-capitalists envision. If politicians can be corrupted by power-lust, so can Mafia bosses.

But if this struggle is impossible and illusory, our only choice would be to throw in the towel.

Today, it is exactly 130 years since the greatest economist of the 20th century (and perhaps of all time) Ludwig von Mises was born. Let’s hope that in the heaven of economists where he has gone, the free and unhampered market economy is not just an imaginary construction, but reality.

In an earlier blog post I mentioned the argument that fractional reserve banking is like insurance: an insurance company never has to pay insurance to every policy holder at the same time; likewise a fractional reserve bank does not have to pay every claim on it at the same time. This argument (as I showed) is as fraudulent as fractional reserve banking itself. There is a similar argument, comparing fractional reserve banking to bridge building:

One attempted justification of fractional reserve banking, often employed by the late Walter E. Spahr, maintains that the banker operates somewhat like a bridge builder. The builder of a bridge estimates approximately how many people will be using it from day to day; he doesn’t attempt the absurd task of building a bridge big enough to accommodate every resident of the area should he or she wish to travel on the bridge at the same time. But if the bridge builder may act on estimates of the small fraction of citizens who will use the bridge at any one time, why may not the banker likewise estimate what percentage of his deposits will be redeemed at any one time, and keep no more than the required fraction? (Murray N. Rothbard, The Mystery of Banking, p. 99.)

In other words: a fractional reserve bank does not have to fear a bank run. It is as unlikely that all depositors will claim their money on the same day or week, as it is for the whole population of an area to cross the bridge at one and the same time.

Fooled by this reasoning? Rothbard answers:

The problem with this analogy is that citizens in no sense have a legal claim to be able to cross the bridge at any given time. But holders of warehouse receipts to money emphatically do have such a claim, even in modern banking law, to their own property any time they choose to redeem it. But the legal claims issued by the banks must then be fraudulent, since the bank could not possibly meet them all.

A very preliminary remark

The first part of this essay is a Facebook note I wrote some months ago; the second part is added now.

Ludwig von Mises – the “dean of Austrian economics” – maintained that economics is a purely deductive (even “aprioristic”) science, and that induction has no role whatsoever to play in economics. An illustrative quote:

Reasoning is necessarily always deductive. This was implicitly admitted by all the attempts to justify ampliative induction by demonstrating or proving its logical legitimacy, i.e., by providing a deductive interpretation of induction. The plight of empiricism consists precisely in its failure to explain satisfactorily how it is possible to infer from observed facts something concerning facts yet unobserved. (Ludwig von Mises, The Ultimate Foundation of Economic Science, p. 21.)

This view obviously clashes with Objectivism. One may excuse Mises on the grounds that he had no opportunity to read David Harriman’s The Logical Leap, which explains the relationship of induction to deduction. However, Harriman’s book deals only with induction in physics and the closely related subjects of astronomy and chemistry (and in philosophy). So I will make an attempt to apply what Harriman writes to economics. It will be only an attempt.

The basis of induction is sense perception. And what is perceived by the senses are actually some simple and basic causal connections. For example, a toddler may observe that when he puts a newspaper into a fire, it will burn. (If the newspaper is damp, it will burn slower.) If he puts his hand into the fire, it will hurt. If he pours water on the fire, the fire will go out. Etc. (Anyone could find other examples.) What the toddler is actually perceiving is causal connections (“fire causes paper to burn” or “my hand to hurt”, “water causes the fire to go out”). Those generalizations are at the bottom of more advanced identifications of causal connections (such as “gravity is the cause of tides and of many other phenomena”).

Is there a similar perceptual starting point for economics? Are there causal connections in economics that a toddler could see with his own eyes? That is the question I will try to answer.

Every science must start with some basic concepts – and the process of concept formation is an inductive process, while the process of applying a concept, once it has been formed, is a deductive process:

[T]he process of forming and applying concepts contains the essential pattern of two fundamental methods of cognition: induction and deduction.

The process of observing the facts of reality and of integrating them into concepts is, in essence, a process of induction. The process of subsuming new instances under a known concept is, in essence, a process of deduction. (Ayn Rand, Introduction to Objectivist Epistemology, p. 28.)

What concepts are basic in economics? There are many, but two that I can think of off-hand are “money” and “exchange”.

A toddler can form the concept “money” by merely observing coins and/or notes. (He would have to learn from some adult that those mysterious little things are called “money”; and it is hardly immediately evident why both coins and certain pieces of paper are both subsumed under the concept “money”; but he will learn that later on.)

What about “exchange” and its relation to “money”? Well, the toddler may accompany his father (or mother or some adult) to a store and observe that his parent passes a coin or note to the store owner, and that this has the peculiar effect of making the store owner pass a bottle of milk (or whatever) to the parent. He is observing an instance of causation, just like when he observed that fire burns paper (etc). It is still mysterious to him exactly what the causal connection is (does the money cause a bottle of milk to pass over, or is it the bottle of milk that causes money to pass over? It may take the toddler some times to understand that this is a case of “reciprocal causation” – and of course that there are other underlying causes yet to be discovered.)

And I have to stress that this is a very preliminary remark. More work has to be done.

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To show that Mises took a Kantian approach, let me quote the following:

A new epistemology of rationalism aimed at the refutation of this [John Locke’s] integral empiricism. Leibniz added to the doctrine that nothing is in the intellect that had not previously been in the senses the proviso: except the intellect itself. Kant, awakened by Hume from his “dogmatic slumbers”, put the rationalistic doctrine upon a new basis. Experience, he taught, provides only the raw materials out of which the mind forms what is called knowledge. All knowledge is conditioned by the categories that precedes any data of experience both in time and in knowledge. The categories are a priori; they are the mental equipment of the individual that enables him to think and – we might add – to act. As all reasoning presupposes the a priori categories, it is vain to embark upon attempts to prove or to disprove them. (The Ultimate Foundation of Economic Science, p. 11.)

So, for Mises, economics rests upon a priori categories not derived from experience but logically and chronologically prior to experience.

Murray Rothbard is actually better (and closer to Objectivism) on this point:

Most writers on the 1929 depression make the same grave mistake that plagues economic studies in general – the use of historical statistics to “test” the validity of economic theory. We have tried to indicate that this is a radically defective methodology for economic science, and that theory can only be confirmed or refuted on prior grounds. Empirical fact enters into the theory, but only at the level of basic axioms and without relation to the common historical-statistical “facts” used by present-day economists. (America’s Great Depression, p. 81; emphasis added.)

So, in Rothbard’s view, at least the basic axioms of economics are derived from experience; which is actually an advance over Mises.

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PS. I should mention that David Harriman actually takes up the very same objection to induction that Mises writes about. Here is a short quote:

As a rule, the attempt to validate induction has taken the form of attempting to reduce induction to deduction. (The Logical Leap, p. 30.)

The Logical Leap itself is an attempt to validate induction inductively. But I won’t go further into that, because you can always read the book.

Some less preliminary remarks

There is one large difference between the natural sciences (such as physics) and the humanities or social sciences (such as economics). It is not hard to grasp this difference, but it needs to be pointed out.

In the natural sciences, experimentation is crucial. The heroes of natural sciences, such as Galileo and Newton (and later, Faraday and Maxwell) performed lots of experiments. Characteristically, in experimentation, one keeps one factor constant and varies some other factor to note what difference this makes.

But in economics and the other social sciences, there is no such thing as experimentation. This, by the way, is a point that Mises stresses over and over again. But this means that the inductive method Harriman describes in The Logical Leap cannot be “translated” into the social sciences.

(Some people undoubtedly try to make experiments in the social sciences. There is much talk about the “communist” or “Soviet” experiment. But we certainly know today – and should have known from the beginning – that those experiments with human life simply end up in total disaster.)

The only kind of experiments one can do in the social sciences is “thought experiments”. Mises, for example, uses “imaginary constructions” (such as “the static state” and “the evenly rotating economy”.) Those imaginary construction have no counterpart in reality; they are merely used as aids to thought; reality can be compared to those imaginary constructions.

A similar case may be found in George Reisman’s Capitalism. He starts out with the assumption of invariable money, something that simply does not exist in reality. But having analyzed what would happen under invariable money, he then adds in what would happen under a gold standard, and then what happens under fiat money.

The way Mises and Reisman uses this deductive method is perfectly sound. But there is a grave danger with it, if one confuses those imaginary standards with reality or makes them the standard for judging reality. This is most readily seen in the idea of “pure and perfect competition”. There is no such thing in reality; but the adherents of this theory think this is how reality should be and recommend policies on this basis. The result, as I am sure you all know, is antitrust legislation. (The “pure and perfect refutation” of this theory is contained in Reisman’s essay Platonic Competition, included in Capitalism, p. 430ff.)

To summarize, I do not think induction plays the same crucial role in economics as it does in physics. But to say that economics is only deduction (as Mises says when he calls the subject “aprioristic”) is going too far; the simple, basic concepts used in economics have to be formed inductively (if for no other reason because concepts are never formed deductively; they can only be applied deductively).

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Now, there are a couple of schools of economics that claim to be using induction and shun the deductive approach to the subject. The best known of those schools is the “German Historical School”. This school objected to classical economics on the grounds that it was “too abstract”, that the theorems of the classical school were divorced from reality, and that the proper way of approaching the subject was meticulous historical and statistical studies. The proponents of this school are also known as the “socialists of the chair” (“Kathedersozialisten”). The errors of this school are thoroughly dealt with by Menger and Mises (the seminal work on the subject being Menger’s Investigations into the Method of the Social Sciences).

Another such school is the “English Historical School”. With this I am not familiar; but I will quote a couple of lines from Wikipedia on this school to show where it leads:

They rejected the hypothesis of “the profit maximizing individual” or the “calculus of pleasure and pain” as the only basis for economic analysis and policy. They believed that it was more reasonable to base analysis on the collective whole of altruistic individuals. (Italics mine.)

Both those schools actually reject economic science altogether. They do not attempt to ground economic theories in perceptible reality; they aim to replace economic theory with history and statistics. If this is an inductive approach, then it must be an improper form of induction.

To try to integrate economic history with economic theory would be a worthy undertaking. But it would have to consist of applying sound (Austrian or Austro-Classical) economic theory to history, not the other way ‘round.

I will give the last word to Ludwig von Mises (unfortunately, I don’t remember the source for this quote):